EU exploring account freezes to prevent runs at failing banks

The original publication date of this article was July 28, 2017 – ER editor

EU explores account freezes to prevent runs at failing banks

FRANCESCO GUARASCIO

European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany July 20, 2017. Ralph Orlowski

BRUSSELS (Reuters) – European Union states are considering measures which would allow them to temporarily stop people withdrawing money from their accounts to prevent bank runs, an EU document reviewed by Reuters revealed.

The move is aimed at helping rescue lenders that are deemed failing or likely to fail, but critics say it could hit confidence and might even hasten withdrawals at the first rumors of a bank being in trouble.

The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits at Banco Popular that contributed to the collapse of the Spanish lender.

It also comes amid a bitter wrangle among European countries over how to deal with troubled banks, roughly a decade after a financial crash that required the European Central Bank to print billions of euros to prevent a prolonged economic slump.

Giving supervisors the power to temporarily block bank accounts at ailing lenders is “a feasible option,” a paper prepared by the Estonian presidency of the EU said, acknowledging that member states were divided on the issue.

EU countries that already allow a moratorium on bank payouts in insolvency procedures at the national level like Germany support the measure, officials said.

“The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge,” a person familiar with German government’s thinking said.

To cover for savers’ immediate financial needs, the Estonian paper, dated July 10, recommended the introduction of a mechanism that could allow depositors to withdraw “at least a limited amount of funds.”